4.2 Contract Performance, Breach, and Enforceability

Performance and Validity Status

Once a contract exists, classify its status. Two scales matter: how far performance has progressed, and whether the contract is enforceable.

Executory contract - not yet fully performed. A signed purchase agreement before closing is executory.

Executed contract - fully performed. After the deed is delivered and funds are paid, the contract is executed.

Void - no legal effect from the start (illegal purpose).

Voidable - valid until the protected party cancels (minor, fraud, duress).

Unenforceable - otherwise valid but a court will not enforce it (an oral land-sale contract that violates the Statute of Frauds).

Table: Contract Status

The Statute of Frauds

The Statute of Frauds requires certain contracts to be in writing and signed by the party to be charged before a court will enforce them. Real estate contracts fall under it because they transfer an interest in land.

Contracts that must be written include:

• Purchase and sale agreements
• Option contracts to buy real estate
• Leases longer than one year (the threshold varies by state)
• Listing agreements (in most states)

An oral contract for the sale of land is not void; it is unenforceable. If both parties voluntarily perform, the deal can still close, but neither side can force the other through the courts.

Electronic Signatures

Under federal law (the E-SIGN Act) and the state-adopted Uniform Electronic Transactions Act (UETA), electronic signatures are generally as valid as ink signatures when the parties consent to do business electronically and the signature can be attributed to the signer.

Breach and Remedies

A breach is a failure to perform a contractual duty. The injured party may pursue several remedies.

• Rescission - cancel the contract and restore both parties to their pre-contract positions; the deposit is usually returned.
• Compensatory damages - money to cover the injured party's actual proven losses.
• Liquidated damages - an amount agreed in advance, frequently the buyer's forfeited earnest money, used instead of proving actual losses.
• Specific performance - a court order forcing the breaching party to complete the sale. It is common in real estate because each parcel is legally unique, so money may not make the buyer whole.

Worked Example

A buyer defaults on a $300,000 contract with a liquidated-damages clause and a $6,000 deposit. The seller keeps the $6,000 as liquidated damages and cannot also sue for additional actual losses; the clause caps recovery at the agreed amount.

Time Is of the Essence

When a contract states time is of the essence, every deadline becomes a strict condition. Missing a date is a breach. Without that clause, courts often allow a reasonable extension.

Exam Traps

• Calling an oral land contract void; it is unenforceable.
• Forgetting specific performance is common because land is unique.
• Confusing liquidated damages (pre-set) with compensatory damages (proven).

Assignment, Novation, and Discharge

Contracts can change hands or end in ways the exam tests precisely.

• Assignment - one party transfers their rights under the contract to a third party. The original party usually stays secondarily liable unless released. Most real estate purchase contracts are assignable unless they say otherwise or call for personal services.
• Novation - the parties substitute a new contract or a new party, and the original party is released from liability. The key difference from assignment: novation extinguishes the old obligation; assignment does not.
• Discharge - the contract ends. It can be discharged by full performance, by mutual rescission, by breach, by operation of law (such as bankruptcy), or by impossibility.

Table: Assignment vs. Novation

Exam Trap: If the question says the original borrower is released, it is novation, not assignment. Assignment alone keeps the assignor on the hook.

Choosing the Right Remedy: A Scenario

Reason through which remedy fits the facts.

Scenario. A seller signs a valid contract to sell a one-of-a-kind historic property for $500,000, then refuses to close because a higher offer arrived. The buyer wants the house, not money.

• Specific performance fits best: the property is unique, so a court can order the seller to convey it. Money damages would not give the buyer this particular home.
• If instead the buyer no longer wanted the property, compensatory damages for any out-of-pocket loss or rescission plus return of the deposit would be the choice.
• Had the contract included a liquidated-damages clause naming the deposit, the parties' recovery against a defaulting buyer would be capped at that deposit.

Match the remedy to what the injured party actually wants: the property (specific performance), to be made whole in cash (compensatory), to walk away clean (rescission), or to enforce a pre-agreed cap (liquidated damages).